FX Boom Shows No Sign of Ending
HedgeWorld, April 27, 2005
NEW YORK (HedgeWorld.com) - After a remarkable expansion, foreign exchange trading continues to attract hedge funds and other active traders despite rough patches, according to industry people.
One factor that encourages an ongoing hedge fund presence in the market: Some fund of funds want to have exposure to FX in order to broaden and diversify their portfolio. It has become entrenched as an asset class.
There's been dramatic growth in FX trading over the past four years, whether spot and forward or derivatives, said Joe Buthorn, vice president at AIG Financial Products Corp. in Wilton, Conn., a market maker in currencies. This was the result of an increase in liquidity, fueled by many new participants.
Funds migrate to FX because it's a good complement to their other trades, said Glenn Stevens, managing director at Gain Capital in Warren, N.J. Gain Capital Asset Management runs currency hedge funds and managed accounts. Another part of the firm is a market maker in forex, with hedge fund clients.
"Currencies have been a very dynamic market in the past year, so we've seen rising interest," Mr. Stevens said. One new trend: People who used to trade FX via futures are now moving into the cash market. "It's a very direct, clean way to do it," he said.
Another Big Player
He sees plenty of new opportunities from geopolitical shifts, uncertainty about Federal Reserve policy and changes of sentiment. In time, he expects that China will float the Renminbi, creating new trade possibilities.
"It's not a question of if, it's a question of when," he said. "Plenty is happening to keep the FX market moving."
Some global macro and managed futures funds do reduce their activity from time to time-many trend followers were hurt by the unexpected upturn in the U.S. dollar. But so far they have come back when conditions look more promising for their particular style.
After equity markets slumped in the aftermath of the technology bubble, investors were drawn to currency trading in search of yield from a trending market. Around the same time, electronic trading reduced transactions costs.
The result was an explosion of trading. While volatility goes up and down, there is no evidence of hedge funds deserting the market. This asset class has become part of the integrated service AIG Financial Products provides to hedge funds and other large investors, said John Cappetta, the firm's head of marketing for North America.
A report from Greenwich Associates attributes as much as 25% of FX volume growth in 2004 to hedge funds and other active traders.
